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Despite Their Best Efforts, Sprint and T-Mobile Will Face an Uphill Climb

The two companies will have to make the case that consumers want fewer choices.

A successful merger between Sprint(NYSE:S) and T-Mobile (NASDAQ:TMUS) would reduce the number of major wireless carriers from four to three. Will that reduce incentives for the new company to offer the same discounts and services that we've seen in recent years?

In this segment from Industry Focus, host Vincent Shen is joined by Motley Fool contributor Daniel Kline as they offer up their final thoughts (and doubts) about this $26 billion deal.

A full transcript follows the video.

This video was recorded on May 1, 2018.

Vincent Shen: We have a few more minutes here. I figure we can spend it going into some of the antitrust regulatory concerns and our personal thoughts on this deal. If you're a betting man, how do you feel about the odds for this deal?

Dan Kline: Well, without getting too political here, I think it happens. The way to get President Trump to be behind something is to appeal to him, to his vanity, to the ways he thinks about things. So is he going to want us to be behind China on 5G? I don't think so. He likes when a company kowtows to him and says, "Oh, please, we're going to do it all your way!" This was very smart. Right after they hit send on the press release, Marcelo Claure and John Legere called Ajit Pai, head of the FCC, a Trump appointee and the person who would take the lead, in terms of at least one aspect of the regulatory approval. And they laid it out, and he basically said, "Hey, I said I'd give you a fair shake." So they're already starting with a chance.

I have very mixed feelings on whether this is good for consumers. I don't buy the Comcast-as-competitor argument. What I do believe is that -- I've been a T-Mobile customer for a few years. I was a Sprint customer before that. And T-Mobile's pricing has always been fair. They don't raise it, they give you more stuff. I get Netflix for free now. So as a consumer, I do put a lot of belief in them. How much of that is John Legere, and if he moves on in a few years, does that change? How much of it is core, baked into what they're going to do? Or how much changes if, all of the sudden, they really are a solid No. 2 and don't need to be growing as fast as they're growing?

Shen: To be this scrappy underdog.

Kline: Yeah. But I think you have decades to figure that out. They're going to roll out a cable product. That's a pretty big growth opportunity, aside from adding wireless customers.

Shen: Sure. I'll just say, despite how much Legere and his team are trying to sell this deal as not a reduction in competition due to those cable companies that we talked about, or how it'll give the new T-Mobile more options to improve their pricing, their service for consumers, I think the fact is: Sprint is the low-cost provider right now with the aggressive promotions that they're putting out there, forcing other companies to follow suit. Then, you add to that the T-Mobile Un-carrier initiatives that are still the smaller No. 3 competitor, and we see how that dynamic is very beneficial for consumers.

Kline: If you look at the market now, Sprint and T-Mobile are competing with each other to take customers from AT&T (NYSE:T) and Verizon (NYSE:VZ). That forced them to outdo each other. So T-Mobile goes out and gets Netflix. Sprint goes out and gets Hulu. You know?

Shen: It's a very interesting dynamic that I think is very beneficial.

Kline: And that's going to go away. They will still be competing with AT&T and Verizon for customers, but they're already cheaper than them. They already have better customer service and cooler perks and a hipper image. So they're not going to have to go as low, and that's something. But is Sprint sustainable as a stand-alone company, giving away service?

Shen: We'll get to that. I just want to bring up the comparison to the broadband industry. I pose this question to any listener: Who's happy with the number of options and the service that they get from their broadband internet provider?

And the fact is, you see how single providers, basically monopolies, exist in a lot of regions in this country, where it hurts consumers with poor service, slow speeds, and forget the idea of switching costs. Where do people go when there's no one else to turn to, because you only have one option? So that's something that, again, I think I share the sentiment of the previous administration in terms of the regulators fearing that going from four to three isn't going to be benefiting consumers in the end.

But if we look at deal precedents now, so taking a more standardized, formalized look at this, I'm also skeptical that this deal is good for the market, and I'm optimistic that regulars will step in. Go back to 2011. AT&T attempted to complete their own takeover of T-Mobile, but regulators in President Obama's administration, they again fiercely opposed the deal. The companies tried to pitch the deal as a rescue of T-Mobile, basically saying, it's the lagging No. 4 player. And even though AT&T said, "We'll make major concessions," like selling off big parts of T-Mobile to other competitors, "to make this deal go through," it didn't happen. The deal fell apart late in 2011, and T-Mobile ended up taking home a $4 billion breakup fee, some spectrum.

But market sentiment at the time was, "Oh, T-Mobile is going to end up being the big loser from this failed deal, because they're not going to be able to compete." But where are we now? It's 2018, seven years later, T-Mobile is No. 3. They're putting up some of the strongest growth numbers in the whole industry. So it's hard for you to buy this argument --

Kline: That's the biggest problem with the two parent companies having such deep pockets. You can't really argue that they're just going to go away. There are also other moves to be made. Sprint talked with Charter and Comcast, and there was a lot of logic to that deal happening. And again, it fell apart for control and promises. But there are other players in this space who could benefit. So this isn't AT&T and Time Warner, which is a deal that, currently, the Department of Justice is suing.

Shen: It's going through the final process. We'll hear about that soon.

Kline: Yeah. But that deal, as you mentioned earlier, is more of a vertical deal. It's a company acquiring more assets that don't relate to the ones it has. This deal is a little bit closer to the failed Staples - Office Depot, where from a consumer point of view, you will lose choice. And it's very hard to argue that the fact that there are a few secondary brands offering limited service -- if Budweiser goes off the market, the fact that some guy in your neighborhood brews beer that's sold at three shops doesn't really change the overall market.

Shen: [laughs] A stretch, but I hear where you're coming from. So if part of the rationale for this deal is to save Sprint because they're struggling, high debt loads, have to spend a lot more money to build out their network. I'm not going to deny that the spending, necessarily, for the company to remain competitive is substantial, but I also don't think it's clear for anybody how things will pan out even just a few years from now, given the way these companies are expanding, for example, like you mentioned, into the cable space.

So 2014, Sprint first approached regulators about a deal. They got shut down, too. We talked about that already. I don't think anything has changed from that situation except that Sprint and T-Mobile have switched their rankings.

Kline: We also have to talk about, the value of 5G is a theoretical in the wireless business. 4G, for everything you do on your phone now, except possibly stream certain video, 4G is just fine. So to assume that a 5G network is necessary on the consumer level -- not on the corporate enterprise level, not with all the Internet of Things that you could do -- it assumes that we're going to have cable or something like it, high-level video, delivered over these. Consumers have to adopt that for it to happen. It's a really big switch to go from a wired cable box and cable on every TV in your house to some other system. And we've seen it with the OTT, Sling TV, and things like that. They're nice niche products, but are you actually going to get widespread change? You might. T-Mobile has shown it can disrupt. But it's certainly not a foregone conclusion.

Shen: Sure. So we're out of time here. I'll end on this note. This is about the 5G part of the sales pitch for this deal, and the idea that AT&T and Verizon are not working on getting their 5G networks built out. I think that's absurd. The companies are absolutely pouring money into the opportunity. You're right, it's theoretical. But given the added capacity and speed that it offers, there's definitely a lot of perks, and there's a reason why a lot of people are looking at it.

Kline: They also own related products that make a lot of sense, in terms of 5G.

Shen: And from what I've seen on AT&T's side, for example, they're already planning to test the service in certain markets by the end of this year. Small-scale tests, admittedly, but I don't think it's fair to make this argument that they're not dedicating enough attention to the opportunity, and that this new T-Mobile is the only way that U.S. companies are going to be able to secure it.

Kline: What is interesting is that T-Mobile is pledging to do it nationally. AT&T and Verizon likely would have done it much more selectively, as we saw with 4G during the initial rollout. So there is a benefit. If they promise and give a timetable, that will force AT&T and Verizon to do the same. But all this would do is speed it up. AT&T and Verizon were not going to ignore this opportunity.